By Charu Chanana, Head of FX Strategy at Saxo

Charu Chanana

Fed easing expectations are well-priced in by the markets, but US elections are still nine months away to worry about. However, risks of a Trump presidency could start to be considered following his victory in New Hampshire primaries. Trump’s policies around tax cuts and tariffs could amplify fiscal and geopolitical concerns, suggesting scope for a stronger dollar and gains in gold.

With a Fed easing cycle broadly priced in by the markets, focus is shifting to what’s not priced in – US elections. To be fair, we are still far from November, but the recent primaries suggest that markets would be pressed to start to pricing in a Trump presidency sooner rather than later.

After last week’s Iowa Caucus victory followed by the withdrawal of nomination from Ron De Santis, today’s New Hampshire primary victory has increased the chances of Trump getting a Republican nomination for the 2024 presidential elections in November. Next contest happens in South Carolina on February 24, and Trump is already leading there by double digits in recent polls. While the Trump risk could mean that Democrats look for a new strategy, markets will first be forced to consider the scenario of the return of Donald Trump as the US president.

Policy direction will likely be aligned towards further fragmentation of the global economy. More tax cuts and import tariffs are likely, while geopolitical tensions could escalate. Trump has proposed a four-year plan to phase out Chinese imports of essential goods such as electronics, steel, and pharmaceuticals, and ban Chinese holding of vital infrastructure in the energy, technology, and agricultural sectors, among others. He is calling for an end to the “endless flow of American treasure to Ukraine," and ask Europeans to reimburse the U.S. the cost of rebuilding its stockpiles. This could bring volatility in the long-end of the yield curve as fiscal pressures reign and debt sustainability concerns could amplify. The possibility of trade wars and higher import tariffs would also likely make the Fed concerned about the path of inflation. Together with risks of over-heating the economy, market may be forced to push back on the Fed easing expectations.

While Donald Trump is seen to be a “stock market” president, equities could face mixed outcomes due to the volatility in rates. Big tech may be exposed due to regulation and geopolitical uncertainty, but expectations of low corporate taxes could be advantageous for the SME-exposed Russell 2000 as long as US economic data continues to hold up and recession risks continue to be pushed forward. Spending in energy could be boosted as Trump promises to increase oil drilling on public lands and offer tax breaks to oil, gas, and coal producers, which suggests climate change and green transformation could suffer.

In the FX space, sustained economic growth points to broad dollar strength. What makes the case even stronger are fears that geopolitical risks could worsen, and dollar could get a safety bid. The Chinese yuan would be exposed to higher tariffs, while EUR faces risks from a pullback in Ukraine aid. Immigration policies could also expose the Mexican peso, while Gold is likely to benefit due to safe-haven demand and increased central bank purchases as they diversify their dollar reserves.